Continued low oil prices could have an increasingly negative impact on banks across the Gulf Cooperation Council (GCC), according to Moody’s Investors Service.
Its new report said that this could occur both directly – by a weakening in governments’ capacity and willingness to support domestic banks – and indirectly, through a weakening of banks’ operating conditions.
“Despite low oil prices and a high dependency on oil revenues across the GCC countries, banks’ ratings in the region continue to benefit from their governments’ willingness to tap accumulated wealth to support counter-cyclical spending,” said Khalid Howladar, a senior credit officer at Moody’s and co-author of the report.
“However, continued oil price declines signal increasing challenges to the sustainability of this dynamic.”
The report said that within the GCC, Bahraini and Omani banks are already facing pressure on their credit profiles, primarily because of their weaker local economies and more limited resources of their domestic governments.
Moody’s noted that lower government reserves could also lead to a shift in policy towards more selective support, with the more systemically important and government owned banks likely to be more favoured.
GCC banks’ credit profiles could also be negatively affected indirectly, through weakening operating conditions from reduced public spending and declining inflows of government-related deposits, according to the ratings agency.
“Reallocation of oil revenues to the broad domestic economy through direct public spending and through the banking sector is a key driver of the favourable conditions that have long supported GCC banks,” said J-F Tremblay, associate managing director at Moody’s and co-author of the report.
He said liquidity has been tightening due to significantly reduced deposit inflows from government and government-related entities. On the asset side, however, risks have so far been limited due to bank lending to the energy-related sector remaining relatively low.
Energy exposures only constitute up to 5 percent of banks’ loan books across the GCC, according to the rating agency.
As low oil prices persist, however, oil-related government revenues will continue to decline and, in the absence of some repatriation of foreign capital placed internationally by sovereign wealth funds, liquidity in the banking system could reduce further, it added.
Moody’s report said banks are already being pushed to compete more aggressively for deposits in some jurisdictions and to tap the public markets, thereby increasing funding costs and impacting profitability.